So, how to solve the "Chicken - Egg" problem in platform models? Let's find out with ThinkZone in this article.
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1. WHAT IS PLATFORM BUSINESS MODEL?
Foundation (platform) is a business model in which value is created through a platform that, by a certain mechanism, connects supply and demand parties, motivating them to carry out buying, selling and exchanging activities.
To do so, business platforms create a large community network of suppliers (supply) and bridgehead (demand), use Network Effects to help them interact and transact with each other. In essence, platform businesses do not produce and provide goods to customers like traditional businesses, but they only provide a means of connection between sellers and buyers.
A good example of a platform is Shopee.
Shopee builds an e-commerce platform that helps more than 11,000 small retail shops post products and sell online to tens of millions of buyers. Shopee promotes this buying and selling process in many forms such as price incentives, convenient payment methods, fast shipping, ...
2. THE CHICKEN-EGG PROBLEM
We are now familiar with the fact that Amazon has tens of millions of buyers and sellers using the platform every day, or with Grab, millions of drivers and users across markets. However, when first established, these businesses did not have a ready source to provide products/services (supply), also has no customers (demand). So how to attract demand when there is no supply and vice versa? This is the chicken-egg problem (chicken and egg problem), the biggest problem that any connectivity platform must solve.
In this article, ThinkZone will synthesize and analyze some typical solutions that many platform businesses around the world have successfully applied to solve this problem.
Go from a niche market
The first advice for a platform business is to focus on a niche market, be it geographical niche or type of product/service.
The reason this approach is useful in solving the chicken-egg problem is the ability to focus resources on a smaller market for greater efficiency. When you start in a certain market segment, you can easily research the insights and behaviors of your target audience and prove that your platform truly brings value to them. This will help attract the first customers to join the platform, creating the foundation for future business development.
Businesses can choose different ways to segment the market, but there are two common ways: dividing by geographical area and dividing by product category.
Geographic segmentation is when a business focuses on one or a certain number of areas/cities. For example, when Uber first operated, they only focused on San Francisco and only expanded to other areas when they achieved certain success in this city.
Meanwhile, Flipkart, one of the world's leading e-commerce companies currently supplying a wide range of products from cosmetics, jewelry to sporting goods, started by selling only books. Or Etsy, one of the 4 largest retail websites in the US, initially only offered 3 items: vintage goods, craft materials and handmade goods. These are typical examples of applying the product category restriction strategy.
Which side should we focus on first: the supply side or the demand side?
In most cases, with limited resources in the beginning, startups cannot attract both supply and demand to join the platform at the same time. The question now is: if you had to prioritize one side, which side would you attract first?
There is no right answer for every business, but we can refer to the success of some previous large companies.
A pretty interesting example is Instagram. Instagram today is more than just a visual content sharing tool (photos, videos, stories) more, which has become a popular online sales platform that brings together many businesses and famous brands, typical of a successful marketplace business. But a few years ago when it was first launched, Instagram was simply a content sharing social network, thereby attracting a large number of users - the target audience. (demand) in the chicken-egg model. Once there is a large enough demand, this platform will begin to attract supply (supply) Participate in sales.
Returning to Uber, this startup clearly recognizes that without drivers, Uber's model is completely meaningless, no customers will use it. Therefore, Uber starts by attracting drivers, or service providers (supply) instead of attracting customers first (demand).
So, approaching sellers or buyers first depends on the specific platform model and strategy of each company. Choose the right side to attract to the platform first, the other side will follow suit.
Leverage the success of existing networks
Instead of finding a new source of customers themselves, emerging business platforms can fully take advantage of the existing user base of existing networks, like Airbnb or Tiki have done.
Airbnb has exploited the Craigslist application platform (a platform for buying and selling things with millions of users, many of whom rent and search for accommodation), by giving apartment owners more options: “Post your property to Craigslist” after filling out the form to create a listing on Airbnb. By doing so, millions of Craigslist users when looking for accommodation see a post with the Airbnb logo, and when they click on it, they are immediately redirected to this startup's website. This strategy has helped Airbnb increase the number of users, and has also become a classic case study of growth hacking in the startup world.
Or like Tiki, one of the giants in the Vietnamese e-commerce field, has continuously run ads on Facebook and Google to reach the huge user base of these two platforms and convert them into its customers.
In short, it is possible for start-up platforms “standing on the shoulders of giants”, growth hacks users (both supply and demand) by taking advantage of other major platforms.
Offer special offers to attract target customers
Did you know, Creative Market - an online marketplace for community-created design products with over a million users, that started attracting customers by giving away $5 to each new user? Or did Uber in the early days pay drivers even when they didn't make any trips to ensure there was always a driver when the customer needed it? Or more closely, are e-commerce giants like Shopee and Lazada constantly offering promotional packages to encourage users to use the application and gain market share?
In the above cases, marketplace businesses have offered special benefits to easily attract the first users, or those with the ability to influence other users, creating a foundation for strong development later.
Become the leader of the supply chain in the beginning, then attract other supply sides
Instead of having a headache thinking about whether to start with the supply side or the demand side, many businesses decide to provide products/services themselves to attract customers to use their platform, before developing it into a true marketplace model.
Typically, Amazon warehoused and was the supplier of all orders in the early stages of launch. When it reached a certain number of users, this company decided to build a marketplace model allowing third-party sellers to open stores on the platform, along with items the company itself carries (there are nearly two million sellers offering products on Amazon, and they account for 56% of items sold according to 2020 figures). This approach helps the company avoid the chicken-egg problem in the early stages, and once it has significant demand, the company can easily attract more supply.
Another example is Apple. Apple only opens the App Store to allow third-party partners to sell applications on the iPhone after this product has attracted a large number of initial users.
3. SUMMARY
Connectivity platforms have been a prominent business model in the past decade, and there is much potential for strong growth. However, to be successful with this model, the chicken-egg problem is the first big challenge that startups need to overcome. ThinkZone hopes this article will bring a lot of useful information to help startups following the chicken-egg model solve this difficult problem.
Summary and reference:
https://jungleworks.com/how-to-solve-the-chicken-and-egg-problem/
https://www.applicoinc.com/blog/7-strategies-solving-chicken-egg-problem-startup/
https://www.nfx.com/post/19-marketplace-tactics-for-overcoming-the-chicken-or-egg-problem
https://www.shopery.com/insights/what-is-a-marketplace
https://platformchronicles.substack.com/p/the-chicken-and-egg-problem-of-marketplaces?s=r
https://www.applicoinc.com/blog/what-is-a-platform-business-model/https://dspace.mit.edu/bitstream/handle/1721.1/132815/1262990608-MIT.pdf?sequence=1&isAllowed=y